Flat Top Breakout Pattern: Day Trading Strategy for Beginners #stockmarket #daytrading transcript

in this episode we're going to talk about the flat top breakout this is a multi-candlestick pattern like a bull flag or an abcd breakout pattern but this is a little different from a bull flag in that it is holding strong right underneath a flat top area of resistance as you might already know this is another episode in a multi-part series on technical analysis and candlestick charts where we're talking about how to read stock charts for day trading specifically but you can apply this to swing trading or investing as much as you'd like so let's jump onto the screen share and i'll show you an example of the flat top breakout this is a pretty standard flat top breakout you've got this sideways consolidation underneath the critical level it is very common that these resistance levels right here correspond with you probably already know what i'm going to say half dollars and whole dollars now let me switch over to the white board and let's draw a flat top breakout pattern i'm just going to use purple here my red and green we're getting a little low so this is the stock squeezing up here so this initially could look like the beginning of a bull flag we're going to get a little pullback here and a little bit more right here and then first candle makes a new high and right up we go to the double top okay now in some instances of a flat top breakout you may actually go ahead and take this entry right here of course questions you would be asking yourself would be based on the bull flag pattern is this a nice pullback down towards the nine moving average are we on a one minute time frame is it a five minute chart what's the volume profile do we have high volume on the move up and then light volume on the pull back candles is are one of these candles a like big shooting star or topping tail sometimes the reason we get this flat top is because and of course it wouldn't be a flat top if we broke through that but sometimes it's because of a problem with the pattern that made it not appealing enough for traders to buy it as a bull flag breakout which could be because of the candle shape formation or a volume profile issue or it could simply be the position relative to the nine moving average or the fact that the stock maybe doesn't have a strong enough catalyst on the day which is ultimately what's getting the stock up as much as it already is so what's very common as i already mentioned is that this would occur around half dollars like 750 or whole dollars like seven i mean any any half dollar whole dollar but just 750 for instance so on the flat top breakout this can pull back again and continue to consolidate under this level this can happen for five minutes it can happen for an hour it can happen for three hours it can happen all day long until finally it snaps through that level and that snap right there that's the false that's the breakout what you have to be careful of is a false breakout and so for this reason i honestly haven't been trading flat top breakouts as frequently in this market as i used to we used to find that they resolved pretty well but more recently what we've been seeing is that you have this long period of consolidation it breaks through on the candle wick and then immediately reverses and does this like jackknife where it ends up being a red shooting star candle with false breakout and here's why i think that this has been happening more i think that if the stock was really strong it would have gone here if it was pretty strong it would have gone here the fact that it hasn't now when it finally breaks this is a bull trap so what happens is you get a little surge of buying here the algo moves the the offers out of the way you get that initial spike and then immediately a wave of sell orders comes in as short sellers are going short against this false breakout and now the bid clears out and you get this nasty flush as you have both the short sellers going short and long traders who bought for the breakout getting stopped out that's not to say that we don't sometimes see this pattern work but more often than not recently the flat top breakout pattern has not been one that i've been really a big fan of what we see more often that's been a little bit better has been actually more of a clean uh double top pattern where we come back up we double top like this sort of you know right against this level and then it pulls back down here and then rallies back up but you know honestly you probably already recognize that pattern is really an abcd pattern right a b c breakout point is d that's an abcd pattern yes you could it does sometimes correspond with a double top uh at point uh this this point b right here and the initial high not always but it often does so and this is a pattern i'd be more inclined to trade but only on the second attempt through this level now let's go back to the screen share for a second and let me show you a couple of examples of the flat top and we'll just talk for a second here that when it comes to the characteristics of a flat top breakout typically like a bull flag you have three plus green candles moving up followed by a quick pullback one two three red candles in a row and then a false breakout on the bull flag it tries to make a new high it doesn't work it pulls back again it but it is creating this flat top where it keeps hitting its head on a particular level and i want to show you this example here this is a stock that was experiencing a flat top for hours right i mean this was just under this 572 level from like 10 a.m until like three in the afternoon and when it broke this thing ripped so what you had going for you here was a lot of coiling it was getting coiled up tighter and tighter and tighter and tighter then finally it broke away now it's still possible that this could have created a false breakout where it popped up to 75 and then flushed down but notice on this initially you have the as it's starting to pull away volume is increasing so you have the volume sort of increasing right here moving higher moving higher and peaking as it pulls away and that's really what you want to see on a strong breakout not just a initial pop but sustained volume as it's moving higher and pulling away faster and certainly in this case as it broke over six and was able to hold over that level that was a pretty big deal it broke six it came back down for a second and immediately got back above it and then pulled away up to six thirty this is another example on a higher price stock long period of consolidation right underneath 55 psychological resistance the whole dollar it's a higher price stock and you know at this particular time that kind of ascending wedge that is a really nice looking chart it really is we just don't see them very often because usually like i said a strong stock is just gonna break out it's not gonna wait but if you're lucky enough to see this long pattern the apex level is so obvious right the entry there is a breakthrough high of day 55. now the problem and this is where it gets challenging is where do you get in you know if you get in a little too early clearly this consolidated for hours so you could be in way too early and then you just stop out so what i generally will try to do on this is i'll wait for it to break and i'll show you on the whiteboard this is what this is what i like to do to avoid the false breakout risk so we've got this um candle that's moved up we've got the pull back and i'll just draw lines just let's just say it's kind of like this it's getting smaller and smaller this is our flat top so we've got this wedge formation happening right here and what i'll do is on the candle that breaks i won't take that tray i'll let it break because what it might do is it might jackknife and drop right back down but what it'll almost always do is it'll come back down and re-test this psychological level and if it proves that it can hold it then i buy the dip right there for the rip back through this level and so this is actually a micro pullback following a fresh breakout so down in the description you can see my link to download the micro pullback pdf that's my strategy that i use for trading micro pullbacks on stocks that start to break out so if i miss this initial breakout right here which it would be easy to do when this is occurring over the course of hours what i do is i have a scanner of course my high a day momo scanner that's going to say boom boom boom boom boom this stock is hitting new highs new highs new highs right here as it's hitting new high of day so now my eyes these are my eyes right here they're like oop scanner alert so i see it i pull up the chart if i didn't still have it up or because the scanners are audio alert i hear it i look at the chart and now i'm looking at the retest so if this is 55 right here i'm looking for the retest of 55 and then buy with a stop right around 55 or um 55 54 90 just underneath that level and then that's my entry right there for the move back up so that's really it right now at this point the safer way to trade a flat top breakout uh it's probably it was probably the safer way to trade it even when at the time of that screenshot so here is another one that's really interesting this is a little bit more of a double top in a way you've got this double top here it drops down it comes back up for a triple tap at this level of about 503 it pulls back and then look at this rip when it breaks that level it just takes off now remember this is a five minute chart so within this five minute chart you would have had the opportunity for 10 second micro pullbacks as it started to pull away but it's also possible some of these moves so fast that you really don't have the opportunity to get in for the micro pullback and it just ends up that either you were lucky enough that you were still watching it at the time that it finally broke out or you end up missing it as i said the strongest stocks are the ones that break out right away they don't wait they don't form a five-minute pullback they they don't form a flat top breakout i mean on the five minute they pop up they do a micro pullback on the bull flag and then they just rip and keep going because the catalyst is so strong all right now let's look at another example here this is a classic double top that comes up for the third attempt and on the third attempt it's able to break through the whole dollar of six and you get about a five percent break on a pretty high volume on that candle so this is a pattern that we see fairly often this is one that i'm comfortable with when it came back up here for the second attempt because the first attempt was on a high red volume doji bar doji candle that's risk that's a red flag so i would not have been a buyer right there but i'll come back up for the third attempt as it's proving that it's holding this level all right next example here almost the same pattern double top right here you have to be very careful buying into this double top this is where we get that cup and handle formation which we'll talk about a little bit more well i'll just talk about it right now so the cup and handle formation what we're looking for here is the stock initially squeezes up so we'll just do lines like this it pulls back and then it comes back up sharply and that creates a cup right now so the problem is if you buy right here you're buying right into a double top we don't like to do that what we want to do is we want to let it pull back here and then come back up and that right there is the cup and this is the handle all right so this is sort of the picture perfect is that you have to come back up you let it pull back and then you take the break so that's called a cup and handle formation all right so let's go back to the whiteboard or the screen so that's our cupping handle on this one and you can see that when it broke out it then on the five minute gave you a micro pullback right in here we know this is a five minute chart because of the time frame up here and so we can see that hit a high with the top of that doji right around 550 half dollar it then pulled back and then continued higher and then formed a five minute bull flag right here it did go higher it did make new highs but it didn't sustain that level and continue it still should have been a winner for any trader that bought the first five minute cable to make a new high for that uh flag breakout all right so i hope this has been helpful this has been a breakdown of the flat top breakout pattern again a multi-candlestick pattern like the bullet flag like the abcd pattern but not quite as powerful as either but you know ultimately you could have a flat top breakout that you could interpret as being stronger than a bull flag because it wasn't even weak enough to pull back it just went sideways but that's only when it goes really quick and then keeps going and what we more often see is this kind of continued resistance at that level and so really the healthiest pullback is when you have a moderate bull flag pullback and then it rallies right through the new high so if you didn't already check out the episode on the bull flag you could check that out up there or you could check out the next episode in this multi-part series on technical analysis and candlestick charts